Financial planners should be increasing their emphasis on securities products to increase the level of diversification in clients’ portfolios and counter weak returns from bonds, said Tom Bradley, president and co-founder of Vancouver-based Steadyhand Investment Funds Inc., during a presentation at the Institute of Advanced Financial Planners’ annual symposium in Richmond, B.C., on Thursday.

Canadians are not known for having diversified portfolios and “financial planners have to own the topic of diversification,” he said. “It’s so basic, I know, but Canadians aren’t there, and, as financial planners and investment professionals, this is a topic we need to own.”

Diversification is an especially important topic at a time during which the returns from bonds are not as strong as they have been in years past as a result of low interest rates.

“It’s a wonderful time to be a borrower, which, by definition, means it’s a lousy time to be a lender and buy bonds,” said Bradley, who used his presentation to provide an overview of the following products that financial planners could look into to further diversify their clients’ portfolios:

>Guaranteed investment certificates (GICs)
Although Bradley does not consider GICs to be investment products, he said he chose to address the topic because these products are so popular with clients.

In terms of returns, the results from GICs are barely offsetting inflation, but clients become attached to them because they are the closest things to a risk-free choice within a portfolio, he said.

>Mortgage funds
” [Mortgage funds] are an area in which we can eke out a little more return in exchange for giving up liquidity,” said Bradley. “In most portfolios, there is more room to [take on liquidity risk] than we already do.”

Bradley gave a high grade to the downside protection that comes from these funds thanks to the currently hot real estate market but stated that, when that market turns, there will be mortgage funds that get into trouble.

Mortgage funds are less successful in the area of diversification, with Bradley saying that they don’t provide the same level of diversification that bonds do.

>High-yield bonds
These products are becoming much more mainstream and are an “excellent vehicle” for returns, according to Bradley.

However, high-yield bonds definitely have some downside potential and are a “lousy diversifier” thanks to their high correlation to bonds.

“If the stock market is down, credit markets are probably under pressure and high-yield [bonds] are probably under pressure,” he said.

>Dividend stocks
Returns from dividend-paying stocks receive high marks from Bradley, who said these equities have had a “big tailwind blowing” for the past 35 years and that solid companies should be able to withstand some headwind in the future.

However, good returns are countered by low marks for downside protection.

“We have had eight or nine years of really good markets and people start to forget this but … we will have some pretty ugly times and [dividend stocks] don’t provide downside protection,” he said.

They’re also weak in the area of diversification because if the stock market is in crisis, dividend stocks are in crisis, he continued.

>Alternative products
Bradley included floating-rate funds, hedge funds and unconstrained bond funds among the alternative products available.

Although there’s potential for higher returns with alternative products, they come with their own set of risks, said Bradley: “They’re complex and, therefore, they’re unpredictable and that’s a big issue when you talk about diversification.”

There’s also the issue that these products can be expensive because they tend to have management fees and performance fees, he added.

Photo copyright: nonwarit/123RF